Sept. 27 (Bloomberg) -- The Federal Housing Administration
will take about $1.7 billion from the U.S. Treasury to shore up
its insurance fund after losses on defaulted mortgages depleted
reserves.

The government mortgage insurer will take the draw on Sept.
30, the last day of the fiscal year, FHA Commissioner Carol
Galante said in a letter sent to Congress today. The agency has
about $30 billion in liquid assets and needs more because it is
required to keep enough money on hand to cover all projected
future losses.

“This required mandatory appropriation is an accounting
transfer and does not reflect an up-to-date view” of the
insurance fund’s “performance, its long-term fiscal health or
its current cash position,” Galante wrote in the letter. “In
the next few months we expect updated data and economic
forecasts to reflect what we already know to be true -- the
health of the Fund has improved significantly.”

Projections show the FHA won’t require a subsidy in fiscal
year 2014. Still, the agency’s need for taxpayer funds for the
first time since it was established in 1934 could give
ammunition to Republicans in Congress seeking legislation to
shrink its mission.

The FHA insures $1.1 trillion worth of mortgages and backs
about 15 percent of U.S. loan originations for home purchases,
almost quadruple the 4 percent share it had in 2007.

Bipartisan Proposal

The House Financial Services Committee passed a Republican
bill in July that would largely limit FHA coverage to first-time
borrowers purchasing moderately priced homes. The Senate Banking
Committee in July approved a bipartisan measure that would set a
floor on premiums the agency charges and require it to hold more
money in reserve.

The FHA has already taken independent steps to shore up its
finances. It raised the amount it charges borrowers to insure
mortgages against default and tightened underwriting after an
independent actuary predicted in November that the insurance
fund would require a $16.3 billion subsidy.

Those changes, coupled with rising home prices, helped
shrink the gap. White House budget writers predicted in April
that the FHA would need about $1 billion. That amount grew to
$1.7 billion because increases in interest rates and premiums
led to a drop in the agency’s business volume and therefore in
the revenue it needed to offset losses.

Decreasing Losses

The calculations that the FHA will need a draw are based on
data from December 2012 that were used to craft President Barack
Obama’s budget proposal and don’t reflect recent home-price
increases, decreasing losses on its portfolio and other changes.
Using the more recent data, the FHA wouldn’t need a subsidy,
according to an agency analysis.

The FHA has authority to take the money without prior
approval from Congress. The draw won’t affect the federal debt
ceiling because the money is being transferred between
government accounts, not spent.

The FHA’s shortfall stems largely from loans it backed from
2007 to 2009, when it expanded its book of business as private
capital evaporated. Those loans alone are projected to cost the
agency $70 billion.

In particular, the agency’s need for funds was caused by
losses on reverse mortgages. The FHA backs 90 percent of such
loans, which enable homeowners age 62 or older to withdraw
equity and repay it only when their homes are sold. Declining
home prices have left the agency holding properties worth less
than the amount borrowed.